Storied investor places big bet on future of rail, but massive investments are needed if intermodalism is to achieve its potential.By Peter A. Buxbaum, AJOT Warren Buffett’s recently announced investment of $26 billion to buy the Burlington Northern Santa Fe Railway has put the spotlight on intermodal transportation. Intermodalism has been coming of age for quite a few years now and its advocates say that it represents the future of the U.S. freight transportation system, especially now that environmental considerations have moved to the forefront of political and business consciousnesses. Others are skeptical, saying the future of intermodalism hinges on more mundane factors such as fuel prices. Let fuel prices remain relatively low, or even drop, and intermodalism will have little chance of increasing its market share. Other considerations include the ability of railroads to raise capital to expand capacity and the ambiguous inclinations of the U.S. government to incentivize such developments. Buffett, who is known as a level headed value investor, is generally seen as having given a major vote of confidence to U.S. railroads with its takeover of BNSF. “Every study shows the railroad business doubling over the next 20 years,” said Larry Kaufman, a Denver-based railroad consultant and former rail executive. “Buffett buys going concerns and doesn’t invest in new managements.” While some see railroading as a 19th century business, Gil Carmichael, a former federal railroad administrator and founding chairman of the University of Denver’s Intermodal Transportation Institute (ITI), said the industry will regain dominance in the 21st century. “In this century we’re going to be using railroad rights of way almost to the same extent we used interstate highways in the last century,” he said. “Warren Buffett has 40,000 miles of right of way with BNSF. It is a beautiful asset.”
Major trucking companies such as J.B. Hunt, Schneider National, Knight Transportation, and Werner Enterprises are putting larger proportions of their trailers on rail chassis for long hauls, Carmichael noted. “In the case of J.B. Hunt, more than 50 percent of company revenues comes from intermodal,” he said, “and this is the number two trucking company in the country. When you can move a ton of freight as far on a gallon of fuel as railroads can do, it explains why truck lines are becoming the biggest customers of the railroad companies.” But intermodal rail is not a major option for most shippers, according to John Schulz, a transportation expert with Gerson Lehrman Group, a New York-based consultancy. “Because of rail’s limited scope, I estimate that 90 percent of all-truck shippers today have no viable rail alternative,” he said. “Sure, rail is fine on 1,500-mile lengths of haul from Chicago to Los Angeles or Chicago to Portland. Chicago to Dallas is another good route. But suppose you want to go from a company’s distribution center in central Pennsylvania to Cleveland. No way that’s going by rail.” Part of the answer to Schulz’s argument is that the Class I railroads have been investing prodigiously in expanding capacity in recent years and are expected to continue to do so. One advantage BNSF may derive from the Buffet acquisition, according to Tom Finkbiner, senior chairman of the board at ITI, will be greater freedom to invest for the longer term. “Being a privately held company will allow BNSF to focus on the longer perspective,” he said. “It won’t have to focus on short-term stock moves. It will be able to initiate programs that promise longer term payoffs.” Those longer-term opportunities will presumably involve increasing rail capacity. “The railroad industry has been expending significant capital, on the order of $8 billion to $10 billion a year, to increase capacity,” said Finkbiner. This will allow the railroads to handle more intermodal volume and